Douglas County officials wary of proposed property tax changes
Douglas County officials say they still have concerns about a bill pending in the Kansas Legislature that could eliminate property taxes on certain kinds of industrial property, even though the bill appears to have been narrowed from the original language introduced last year.
An earlier version of the bill, which died in the legislature last year, would have made it easier for large facilities like oil refineries and ethanol plants - but also other industrial facilities - to classify certain kinds of permanent fixtures on their property as machinery and equipment instead of real property.
That change would effectively exempt much of that property from taxes because Kansas now exempts from taxes machinery and equipment purchased or leased after 2006.
Based on estimates from some county appraisers, Douglas County administrator Craig Weinaug said, the original bill could have wiped out about 60 percent of the state's industrial property tax base. It would have meant a loss of about $2 million to Douglas County government, and another $6 million for other local governments – mainly cities and school districts. The difference would probably have to be made up by increased taxes on residential property.
But local officials say a new version of the bill, S.B. 2285, which was introduced earlier this month, appears to narrow the scope so the impact would apply mainly to chemical and oil refineries.
“Staff and I visited a little bit, but I have not formulated a specific opinion about the impact" of the changes, Douglas County appraiser Steve Miles told county commissioners. “I feel like the narrowing of the language … it's still broad enough that it's going to impact other industrial properties over time.”
The House Taxation Committee was to have had a hearing on the bill Thursday, less than 24 hours after a report was issued by the Legislative Post Audit Division explaining the background of the bill and the specific tax issue that it tries to resolve. But that hearing was postponed due to the snow emergency and has been rescheduled for 3:30 p.m. on Monday.
For homeowners looking at their property tax bills, there is no difference between real and personal property: the house, appliances, plumbing and air ducts are all lumped together as a single unit. But in large, complex manufacturing facilities, machinery and equipment are classified as “personal property” and are appraised and taxed separately from the building itself, which is considered “real property.”
The problem, according to the Post Audit report, is that in certain large facilities, the difference between a permanent fixture and a piece of equipment can be subtle, and the way county appraisers have treated them has been been inconsistent over time.
Because new machinery and equipment purchased or installed since 2006 is now exempt from taxation, factory owners have a lot to gain or lose by how those items are classified.
The issue came to the legislature last year because of a decision by the Kansas Court of Tax Appeals in a case involving CVR Energy Inc., owner of the Coffeyville Resources Nitrogen Fertilizer plant in Montgomery County. At issue were tanks, piping and cranes that were used in manufacturing. From 1998 through 2007, those items were classified as personal property and were under a 10-year tax abatement because they'd been financed with industrial revenue bonds.
When the tax exemption expired in 2008, the property came back on the tax rolls. At that point, if CVR ever replaced the equipment, it would be exempt from property taxes under new tax laws enacted two years earlier. But Montgomery County hired an outside firm to appraise the property, and that firm reclassified those items as real property. That meant that the items would continue to be taxed, even if the company replaced the items.
CVR appealed. But in January 2012 the Kansas Court of Tax Appeals upheld the county's decision. The plant's owners then went to the legislature to lobby for a bill that would change the law.
Last year's bill would have established a new category of personal property called “trade fixtures,” which would include any item used in a business, regardless of whether it is permanently affixed to the real estate.
That would include, "commercial and industrial machinery and equipment placed upon or permanently attached to owner occupied or leased real estate and directly used in conducting trade, business, commercial, industrial, manufacturing or processing activities."
At the time it was debated, the Post Audit report noted, there was no source of data to show how much industrial property that would have affected. But the auditors now estimate it would have reduced statewide property taxes paid by $170 million to $500 million per year. That, in turn, probably would force local governments to raise taxes on residential property to make up the difference, the auditors said.
The new bill now pending in the House Taxation Committee is more limited. It says that equipment cannot be considered a fixture or improvement for property, “if the item may be disassembled, detached or removed from real property without causing significant damage to the item.”
However, fixtures that are “common to buildings and intended to primarily benefit the real property rather than the trade or business conducted on the premises” would be considered part of the real property and, thus, would be taxable.
County appraiser Miles said he and his staff are still working to figure out how that would affect the tax base of Douglas County.